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European Parliament narrowly rejects carbon "backloading" plans

The European Parliament has narrowly voted to reject a temporary fix for the EU's struggling Emissions Trading Scheme (EU ETS), claiming that the proposals would "undermine confidence" in the system.17 Apr 2013

It voted against a proposal by the European Commission that would see auctions for some 900 million carbon allowances postponed, or 'backloaded', to address falling prices and lack of demand. 334 MEPs voted to reject the proposal, while 315 voted in favour and 63 abstained. The proposal will now be referred back to the European Parliament's environment committee for further consideration.

"MEPs opposing the measure advocate deeper reform of the EU ETS and fear that interfering with the supply of credits could undermine players' confidence in the scheme," the European Parliament said in a statement. "Some also believe that a rise in the carbon price would erode the competitiveness of European industry and be passed on in household energy bills."

In a separate vote, the European Parliament agreed to temporarily suspend the EU ETS for intercontinental flights.

Environmentand energy law expert Eluned Watson of Pinsent Masons, the law firm behind, said that the vote was a "heavy blow" for the scheme and its future viability as "an effective legislative mechanism to promote reductions in greenhouse gas emissions and to drive investment in low carbon technologies".

"There are fears that the 'no vote' will lead to countries each legislating on their own alternative policies and carbon taxes instead of creating a level playing field for industry," she said. "At UK level, there are likely to be impacts on the level at which the UK's own carbon price floor mechanism is set. What is clear is that the future of the EU ETS now lies in securing vigorous, ambitious and deep reforms of the scheme and quickly."

The EU ETS was established in 2005 and was the first major emissions trading scheme in the world. Phase 3 began on 1 January 2013 and runs until 2020. Under the scheme there is a cap on greenhouse gas (GHG) emissions from prescribed energy intensive installations. Installations must purchase GHG emissions allowances, called European Union Allowances (EUAs),  representing the right to emit or discharge a specific volume of emissions in line with national allocation plans. Operators of installations must hold EUAs equal to, or more than, total emissions at the end of the EU ETS year and those with excess allowances can 'bank' allowances or trade with those who need to buy more allowances to comply with emissions limits.

Under the EU ETS Operators of installations that fall within the EU ETS must hold EUAs equal to, or more than, total emissions at the end of the EU ETS year. Installations with excess allowances can 'bank' them or trade with those who need to buy more allowances to comply with emissions limits.

The European Commission's proposals would see 900 million allowances that would otherwise have been made available for auction between 2013 and 2015 transferred to later in the third phase of the EU ETS. By doing this, the Commission hopes to address the build-up in allowances caused by reduced industrial activity during the economic downturn. The price of allowances is currently just over €4 per tonne according to Thomson Reuters Point Carbon - well below a historical average of €30 per tonne.

In its first report on the carbon market, published at the end of last year, the Commission proposed six longer-term structural changes to the scheme. These could include increasing the EU's carbon reduction target from the current 20% to 30% by 2020, the permanent cancellation of a number of allowances or extending the scheme to cover additional sectors.

In a statement, the UK's Department of Energy and Climate Change (DECC) said that it was "disappointed" by the Parliament's vote. UK Secretary of State for Energy Ed Davey was one of six national ministers to sign a letter to MEPs (1-page / 57KB PDF) urging them to back the proposals last week.

"The UK understands that the ENVI Committee will now discuss the proposals once more, and therefore hopes that a positive outcome can still be achieved," a spokesperson for DECC said.

"In parallel, the UK Government feels that we should now focus on the real issue – the urgent need for structural reform. The UK has been discussing with participants and stakeholders how best to reform the EU ETS and similar debates will be taking place in other countries. The Commission must now bring forward concrete legislative proposals for reform of the EU ETS later this year, following their current consultations on their Carbon Market Report," the spokesperson said.